Wall Street stumbled on fading hopes of jumbo Fed rate cuts

·         The Aug’24 US NFP/Job report may be termed as soft, but the overall labor/job market is still robust and Goldilocks in nature

·         The 6MRA of the unemployment rate at 4.0%; core inflation is around 3.0% against the Fed’s targets of 3.5% (minimum unemployment rate) and 2.0% (price stability)

·         Fed may start cutting rates by 25 bps from Sep’24 QTR and continue the same for the next 10-11 QTRs end until core inflation does not surprise on the upside in Aug’24

·         Wall Street was also under pressure on fading tech/AI optimism; the market is now concerned about any next financial crisis being led by an AI bubble (like dotcom)

On Thursday, Wall Street Futures, Gold stumbled from a soft ADP high after the expected service PMI report, which may keep the Fed for a less dovish stance about rate cuts. On Friday the focus of the market was on the NFP/BLS job report for August, which may help the Fed to make a firm decision about rate cuts at the 18th September FOMC meeting. But the Fed may also consider August core inflation data to be released on 11th September before going for any rate cuts.

On Friday, the latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy (Private + Government) added +142K Non-Farm Payroll (NFP) jobs in August against downwardly revised +89K sequentially (m/m); +210K yearly (y/y), and lower than the median market expectations of +160K. The US NFP employment covers public (government) and private sector employees/jobs excluding the farming/agri industry.

After the latest revisions (without considering preliminary NFP benchmark revision published on 21st Aug’24), the 6M rolling average (6MRA) of US NFP job additions was around +164K in Aug’24, which is lower than +194K in the prior report. Also after the latest revisions, the 2024 (MTD) average of US NFP payroll job addition was around +184K against +203K in the prior report; +251K in 2023 and +377K in 2022. Although, the Fed’s preference of around +200K; considering a higher labor force amid higher immigration and a higher working-age population, the Fed may now prefer 225K average run rate of NFP Payroll job addition for its maximum employment mandate, while the red line may be below +175K (against pre-COVID levels of +150K).

On Friday, the BLS flash data also showed Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +118K payroll jobs in August from downwardly revised +74K sequentially (m/m) and +150K yearly (y/y), lower than the market expectations of +130K, but higher than the ADP figure +99K (released Wednesday).

After Aug’24 flash data and revisions, the 2024 (YTM) average of US private payroll job addition was around +152K vs +165K in the prior report, and against the 2023 average of +192K, the 2022 average of +352K, and the 2021 average of +571K. On the other side, the 2024 (YTM) average of ADP private payroll addition was around +151K in Aug’24; and +209K in 2023. After the latest revisions, the 6M rolling average of NFP private job addition is now around +139K vs +160K prior report and +154K ADP survey. The divergence (difference) between NFP and ADP private payroll addition numbers is now gradually converging, although a nominal number of private employees remains around 3K higher in BLS/NFP data than ADP (135440K vs 132442K) as all private business firms/establishments are not using ADP payroll processing software.

On Friday, the BLS Establishment survey flash data also shows the Government payroll, i.e., employment in Federal, state, and local governments added around +24K jobs in August against +15K addition sequentially (m/m); +60K yearly (y/y), and lower than the market expectations of +30K. After the latest revision, the 2024 (YTM) average for the US government payroll was around +32K against +38K prior and +59K in 2023, and +25K in 2022 and +33K in 2021. The 6M rolling average of US NFP government job addition is now around +25K vs. 34 K prior reading. In the election year (2024); the government payroll job addition was quite upbeat and was running around the pre-COVID levels of an average of around +50K in the prior report, but now slows down, mainly led by local and state governments.

In Aug’24, the US NFP payroll was boosted by job gains in private education & health services, leisure & hospitality, construction, and government. In contrast, employment declined in manufacturing, retail trade, and information. In Aug’24, US construction jobs got a boost after the end of the rainy season.

Overall, for the last six months, private education & healthcare services were the biggest employers, followed by government and leisure & hospitality (travel/tourism & hotels), transportation & warehousing, construction, retail trade, professional & business services, while US payroll job creation was dragged by mining & logging, manufacturing, and information/techs (AI disruption). Housing/construction is always a bright spot in the US economy.

The U.S. economy is primarily a service sector economy (unlike China) and the service sector is the biggest contributor to the economy, but that too is significantly dependent on millions of immigrants, students, patients, and tourists from developing countries like India, Bangladesh, Pakistan, Sri Lanka, and other major South Asian/American/African countries and even China due to better standard of living, better democracy (freedom of speech/after speech), better pay, lower cost of living (price stability) and also currency leverage. But in the last few months, AI disruption may be also cutting human jobs in the tech industry.

The US, the world’s largest economy is the land of immigrant talents and innovation. The demand for private education and healthcare is huge among not only rich Americans but also rich immigrants, especially from developing countries like India, Bangladesh, and even China. Also, big corporate families from various developing countries like India usually send their children for education in the US to not only earn degrees from world renewed institutions but also to network as children of almost all big business houses in the world including the US/UK/EU are also studying in those big US educational schools/colleges/institutions.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for June was revised down by -61K to +118K, and the change for July was revised down by -25K to +89K. With these revisions, NFP employment in the last two months combined was down by -86K than previously reported (against a 2M negative revision of -29K in the last report).

With the latest monthly revisions, the US economy added an average of around +184K payroll jobs (NFP) in 2024 (YTM) against the pre-COVID (2015-19) long-term average of +187K, and the Fed’s goldilocks rate around +200K (175-225K), to keep an overall unemployment rate below 4.5% red line (long term sustainable unemployment rate keeping average core inflation around +2.0% as price stability). The 2024-YTM average of the US NFP employment rate (NFP Employees/Labor Force-HH survey) was around 94.3% in Aug’24 against 93.4% in 2023 and 92.8% in 2022.

NFP 2024 Preliminary Benchmark Revision:

On 21st Aug’24, in accordance with usual practice, the BLS announced the preliminary estimate of the upcoming annual benchmark revision to the establishment survey employment series. The final benchmark revision will be issued in February 2025 with the publication of the January 2025 Employment Situation news release.

Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for March. These counts are derived from state unemployment insurance (UI) tax records that nearly all employers are required to file. For the National CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus one-tenth of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates an adjustment to March 2024 total nonfarm employment of -818K (-0.5%). As of now, BLS has not revised the NFP data series but will adjust/revise it after the final revision in Feb’25.

Payroll employment up 303,000 in March 2024: Final Revision for 2023-24

Total nonfarm payroll employment rose by 303,000 to 158.1 million in March 2024, higher than the average monthly gain of 231,000 over the prior 12 months. Health care added the most jobs with an increase of 72,000 in March. Over the past 12 months, the industry averaged a gain of 60,000 jobs per month.

Present NFP data will be also revised annually/finally in Jan’25:

Overall, looking at the data, the annual revision is not as significant as being conveyed by the Fed after some market panics after the headline that BLS has revised down US NFP job growths for the year ending in Mar’24 by -818K.

The divergence between NFP and ADP private payroll monthly job addition numbers is now almost nil on a 2024 YTM basis amid the increasing adoption of real-time ADP payroll processing software in private establishments. But, overall, a nominal number of US NFP Private Payroll employees is still higher by over 3100K in the BLS survey than ADP.

The ADP Report is based on the actual anonymized and aggregated payroll data of more than 25 million U.S. employees. The BLS survey samples a much larger number of establishments, around one-third of all nonfarm payroll jobs, compared to the ADP survey which is based on data from ADP's client companies, using ADP payroll processing software/system only. The BLS surveys about 141K businesses and government agencies, representing approximately 486K individual work sites, to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls under the Current Employment Statistics (CES) program.

The larger sample size of the BLS survey allows it to provide a more comprehensive and accurate representation of the overall employment situation in the US. Furthermore, the BLS survey uses more rigorous statistical methods and adjustments to account for seasonal variations, business births/deaths, and other factors that can impact population/labor force and employment data. This helps the BLS survey provide a more reliable and consistent measure of nonfarm (NFP) payroll employment than ADP.

The BLS survey is based on a sample of business establishments, while the ADP survey is based on payroll data from businesses that use ADP for payroll processing. Differences in sampling methods, sample sizes, and data collection techniques can lead to variations in the reported figures. The BLS establishment survey and the ADP private payroll survey are conducted at different times of the month, which can also contribute to variations in the reported figures.

On Friday, the BLS household (HH) survey data indicated the nominal number of the US civilian labor force increased by +120K in August to 168549K against the civilian population of 268856K (+212K); participation rate 62.7% vs 62.7% sequentially and against pre-COVID average participation rate around 63.1%; while 2006 levels was around 66.4% (pre-GFC days). The current 6MRA of labor force addition was around +191K against the Non-Institutional Civilian population (age above 16 yrs) growth of +184K, while the labor force participation rate at 62.6%.

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons (including professionals, contractors, and agri workers), the U.S. economy has added +168K employed persons in August, against the addition of +67K sequentially (m/m) and +291K yearly (y/y). The U.S. had around 161434K employed persons in Aug’24; eased from the recent life time high around 161866K scaled in Nov’23. As per the BLS household survey, the average number of addition of employed persons for 2024 (YTM) was +31K in August against the 2023 average of +157K and 2022 average of +265K.

 

As per Household survey data, the nominal number of unemployed persons decreased by -48K to 7115K in August against 7163K sequentially (m/m) and 6340K yearly (y/y). In Aug’24, the U.S. unemployment rate edged down to 4.2% from 4.3% sequentially (m/m), 3.8% yearly (y/y), in line with the market expectations of 4.2%, and almost at the highest of 4.3% scaled in July (since Oct’21). The 2024 (YTM) average unemployment rate was 4.0% in August vs 3.9% prior and against the 2023 average rate of 3.6%; the current 6M rolling average of the unemployment rate was also 4.0%, still below the Fed’s 4.5% red line. Fed’s maximum employment may be around 3.5% unemployment rate on a durable basis; i.e. 96.5% employment rate, which is now around 96.0%.

Further fine prints of BLS H/H survey data indicate non-agri /non-farm (NFP) employees at 149476 and 11958K self-employed persons + agri workers, totaling 161434K employed persons in Aug’24. Among this, non-agri self-employed persons (small business owners, professionals, contractors, etc) were 9475K and agri-related workers and self-employed persons at 2483K in Aug’24.

 

An increasing number of multiple jobholders may be one of the primary reasons behind the increasing unemployment rate:

Fine details of the US NFP/BLS job report indicate non-agri/non-firm (NFP) payroll employees (PVT+GOVT) were around 158779K in the establishment survey against 149476K in the household survey. The average divergence between these two surveys (BLS establishment and household) was around +213K for 2024 (YTM); If we deduct the number of NFP employees as per the BLS establishment survey and that of the household survey, we may have an idea of multiple job holders (employees under non-agri payroll), which is almost equivalent to this divergence.

As per the BLS household survey, the average number of addition of employed persons for 2024 (YTM) was +31K in August against the 2023 average of +157K and 2022 average of +265K. This is sharply contrasting to the average addition of payroll employees as per the BLS establishment survey, which is +184K for 2024 (YTM), +251K for 2023, and +377K for 2022. The divergence between the two surveys may be explained by the increasing number of multiple job holders who may be counted twice/thrice in the establishment surveys against once in the household survey. The YTM average addition of multiple job holders was around +213K in Aug’24, almost equivalent to the average number of NFP employees 184 and employed persons 31K (184+31=215K)

Overall, as per BLS seasonally adjusted/unadjusted data, now almost 5.4% of employed persons in the U.S. are multiple job holders, against 4% in 2023 and 3.6% in 2022 on average. The nominal number of multiple job holders was around 9403K in Aug’24 against 6159K yearly (y/y) and 5229K on average in 2021. The increasing number of multiple job holders over the years may be explained as:

·         People may be taking additional full-time/part-time jobs (WFH) to meet the increasing cost of living (still 20% higher inflation than pre-COVID times)

·         Fear of sudden layoffs/salary cuts during any financial crisis (like COVID, 2007 GFC)

·         The flexibility of WFH, higher productivity for both employees and employers (part-time/freelancers may do the same work more efficiently at lower pay than regular full-time employees),

·         Sometimes lack of experienced workers for a specifically required skill; a flexible mix of WFH/WFO (remote/onsite) may be more positive for overall labor productivity and lower inflation

In both the BLS establishment survey and the ADP private payroll survey, individuals who hold multiple jobs are usually counted based on their primary employment; i.e. only once. In the BLS establishment survey, individuals are counted based on the establishment where they work as their primary job. If someone holds multiple jobs, only the primary job is counted in the survey. The BLS survey collects data from business establishments and counts the number of employees on their payroll, regardless of whether they have one or multiple jobs.

Similarly, in the ADP private payroll survey, individuals are usually counted based on their primary job. ADP gathers payroll data from firms/companies only that use their payroll processing services/software, and it counts each individual based on their primary employment relationship with the businesses included in the survey. If someone holds multiple jobs and one of those jobs uses ADP for payroll processing, only the primary job with ADP would be counted in the survey; if the multiple job is in another company, which does not use ADP payroll software/system, he will be not counted twice.

Both BLS and ADP surveys focus on primary employment relationships to avoid double-counting individuals who hold multiple jobs. But neither survey captures secondary job information comprehensively, so there may be some scope of undercounting of multiple job holders in both surveys. Additionally, the BLS survey samples a much larger number of establishments, around one-third of all nonfarm payroll jobs, compared to the ADP survey which is based on data from ADP's client companies, using ADP payroll processing software/system.

The increasing number of multiple job holders may be the reason behind a drop in the total number of employed persons despite an increase in headline NFP job/employee numbers in the last few months. The US BLS NFP/Establishment survey may count multiple jobs twice (if a person is doing two jobs at a time in WFH/remote mode or even physically in two shifts), while the BLS Household survey does count such multiple job holders as one employed person.

The BLS Household survey includes payroll employees and self-employed persons such as professionals, gig workers/freelancers, contractors, and agricultural workers. In the Household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll. Thus often there are divergences between the number of employees and several employed person additions in a month between these two BLS surveys (Establishment and Household).

The U.S. private Average Hourly Earnings (AHE) was around $35.21 in Aug’24 vs $35.07 sequentially (+0.4%) and $33.91 yearly (+3.8%); i.e. the U.S. AHE grew +3.8% yearly in Aug’24 against +3.6% sequentially, and above the market expectations of +3.7% (y/y). Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.00% on average against its +2.0% price stability (inflation) targets (as per the pre-COVID trend) so that there is some real wage growth, but may not cause wage inflation spiral. The average AHE growth for 2023 was around +4.5% against 2024 (YTD) +4.0%, still higher than the Fed’s target of around +3.0%, but in line with the pre-COVID trend.

On a sequential (m/m) basis, the AHE grew by +0.4% sequentially against +0.2% in the previous month, and higher than the market expectations of +0.3% gain. The average hourly earnings (AHE) for all employees on US private nonfarm payrolls edged up +$0.14 sequentially to $35.21 in Aug’24. The Fed needs an average sequential AHE growth of around +0.2% consistently for its price stability targets, while the 2023 average was around +0.3%, almost the same in 2024 (YTD).

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll was edged up to 34.3 hours in Aug’24 from 34.2 hours sequentially (m/m), 34.4 hours yearly (y/y) and in line with the market expectations of 34.3 hours. Average Weekly Earnings (AWE=AWE*AWH) edged up +0.7% to $1207.70 in Aug’24 from $1199.39 sequentially, while increasing +3.5% yearly from $1166.60. This translates to average monthly earnings (AME) of around $4830.81 in Aug’24 against $4797.58 sequentially (+0.7%) and $4666.02 yearly (+3.5%); i.e. the AME grew +0.7% sequentially (m/m) and +3.5% yearly (y/y) in Aug’24.

The average monthly growth of U.S. AME for 2023 was around +3.9% yearly (y/y) against CPI growths +4.1% (y/y); i.e., there were still no wage-inflation spirals and overall real wage growth was negative/almost nil. But in 2024 (till June), AME is growing by around +3.6% against average CPI inflation of +3.2%; i.e. average real wage growth in 2024 (till August) was around +0.4%.

Overall U.S. minimum/average NFP real wage growth is now turning positive (+0.4%) as inflation is falling, which is positive for the Biden & Harris admin (Democrats) ahead of the Nov’24 election despite some uptick in the headline unemployment rate. Also, data shows that immigrants are now getting more lower-end jobs (minimum pay) than Native Americans. Although this may be due to a lack of Native Americans, willing to work at minimum pay lower end jobs,

Trump is now actively campaigning against Biden/Harris for an ‘America First’ political narrative, putting Biden/Harris (Democrats) at some disadvantage. In 2022-23, after all types of COVID era restrictions were withdrawn, there was a flood of legal/illegal immigrants; i.e. supply of more labor force and the previous imbalance between demand and supply got balanced to some extent, resulting in the softening of wage pressure, labor market and also inflation subsequently.

In brief, the Aug’24 NFP/BLS job report may be termed as mixed, rather than soft or hot. Although the US labor/job market has been cooled from very hot in 2022-2023 and Q1CY24, the overall nature is now Goldilocks in nature and line with pre-COVID rimes. If we consider the increasing number of multiple job holders add around +213K average in 2024 YTM), +184K NFP employees and +31K employed persons along with an increasing number of job aspirants/workers/labor force amid higher immigrants/working population.

Also, the 6MRA/YTM average of the US unemployment rate was at 4.0% in Aug’24, still below the Fed’s 4.5% red line, but above the Fed’s minimum unemployment mandate targets of around 3.5%. Almost 5.4% of US employed persons are now multiple job holders (YTM-2024) against 4.0% in 2023; 3.5% IN 2021-22 and 2.0% in pre-COVID times (2015-19). The nominal number of average multiple job holders was around 8643K and if we add back at least 1%; i.e. +864K of multiple job holders to the YTM average of employed persons (6655K), the YTM average of unemployed persons would be around 5791K (6655-864) and with a YTM average of labor force 167912K, the YTM average of unemployment rate would be around 3.5% instead 4.0%.

In summary, the overall US labor market may be now termed as Goldilocks rather than too soft or recessionary despite an elevated unemployment rate of around 4.0% on average and real wage growth of +0.4% (y/y) despite subdued NFP payroll addition number along with nominally employed persons. There is equivalent growth in the number of multiple job holders and also labor force/job aspirants amid a rising working population/immigrants. Overall, there are still not any widespread layoffs and the uptick in unemployment number is mainly due to a higher number of multiple job holders and laborers/job aspirants. But available new job openings

The June’24 US NFP/BLS job report may be termed terrible apparently, but it may be more due to seasonal adjustment/factors; also if we consider the sudden addition of a labor force addition of +420K against the normal average rate of around +200K (due to seasonal adjustments) and temporary layoff 1062K against 800K average in July’24 (due to Hurricane Beryl). This time in August, as expected, the temporary layoff eased back to 872K, normal R/R zone; temporary layoff/LF (%) edged down to 0.4% from 0.5%, but permanent layoff also edged up to 1.5% from 1.4%.

Overall, even after cooling in the last few months, the US labor/job market is still robust or now in Goldilocks mode despite subdued headline NFP payroll employees addition along with huge negative revision and elevated unemployment number along with terrible addition of number of employed persons. Elevated unemployment numbers may be due to the increasing number of multiple jobholders, and labor force/job aspirants rather than widespread layoffs. But at the same time, available open new jobs are declining due to various structural issues in the US; it’s not only presently higher borrowing costs.

The US needs a thrust in infra spending and consumer durable goods production rather than being the ‘king’ in military equipment & airplanes (military + civil) manufacturing space. The US needs to employ more fiscal stimulus in infra (traditional & social) to create more capacity/supply for the increasing population and also the manufacturing sector with appropriate policies in place to compete with China and other manufacturing powerhouses of the world. But the US lacks political & policy consensus as most of the time, the White House runs a minority Government without any broad policy consensus between two main political parties (Democrats & Republicans).

On Friday, the NY Fed President Williams said (soon after the August NFP/Job report):

·         Now is appropriate to lower the Fed funds rate

·         The job market is better balanced, not the main source of inflation

·         Fed policy has been effective in restoring price stability

·         Monetary policy can be moved to a more neutral stance depending on the data

·         I'm ready to start the process of rate cuts

·         I expect the unemployment rate to likely be around 4.25% by year-end

·         US GDP is likely 2%-2.5% for this year

·         The risks to the economy include slowing global growth

·         Risks to the outlook include further weakening in the jobs market

·         I welcome disinflation trends

·         Cooling in the job market retreats from overheated conditions

·         The unemployment rate is still low despite the rise

·         Inflation expectations remain well-anchored

·         I have confidence that inflation pressures are ebbing

·         I expect inflation near 2% next year

·         Longer run expects unemployment to settle around 3.75%

·         I expect more inflation cooling - inflation at 2.25% this year

·         Independent central banks achieve goals better

·         A key part of the 2% inflation target is it's communicated and understood

·         More focus now on balancing the Fed's job and inflation mandates

·         I want to look at the latest jobs report data more closely

·         Jobs data is consistent with a cooling economy

·         There are still significant tailwinds on the supply side of the economy

·         It's clear that labor market imbalances have eased

·         I am not ready to say how big first rate cut should be

·         It is clear rates should fall, but the pace, and destination are less clear

·         The jobs market is more consistent with the pre-pandemic environment

On Friday, Chicago Fed’s President Goolsbee said:

·         The trend of economic data justifies multiple rate cuts

·         The job market is slowing down

·         It raises some serious questions about this meeting and the next several months that we make sure not to make the labor market turn into something worse

·         Today's employment data is a continuation of what we've been seeing

·         There is an overwhelming Fed consensus for multiple rate cuts

·         When asked about bigger rate cuts: Look at the dot plots, which didn't show inflation coming down as fast or unemployment rising so high

·         When asked about the 50 bps cut in September: What happens at the next meeting alone is not what is most important

·         The current employment average is too low for the replacement rate

·         We have a little more tolerance for an upside surprise on CPI as the longer arc shows inflation coming down

·         I am concerned if we maintain this level of restrictiveness, the odds of recession might be rising

·         The critical challenge is not letting things turn into something worse

·         The US labor market at an inflection point

On Friday, Fed’s Governor Waller said:

·         It is likely a series of reductions in policy rates will be appropriate

·         Data in the past three days indicates labor market is softening but not deteriorating; this judgment important to upcoming policy decision

·         I believe maintaining the economy's forward momentum means the time has come to begin reducing policy rate at an upcoming meeting

·         I would also cut at consecutive meetings if data calls for it as I would be for larger cuts if needed

·         If future data shows significant deterioration in the labor market, the Fed can act quickly and forcefully

·         I will be an advocate for front-loading rate cuts if that is appropriate

·         Softening of labor market pattern consistent with moderate growth in economic activity

·         Monetary policy has to adjust accordingly as the balance of risks has shifted to the employment side of the mandate

·         The August jobs report and other recent data reinforce the view there has been continued moderation in the labor market

·         I do not believe the economy is in a recession or necessarily headed for one soon

·         The time has come to begin reducing the labor market softening/not deteriorating

·         Forecasts could be wrong, must be nimble as data comes in

On Wednesday, Fed’s Bostic said:

·         Price pressures are diminishing quickly and broadly

·         There is no panic among my business contacts but describe an economy and labor market losing momentum

·         The most recent inflation reports bolster my confidence inflation is likely on a sustainable path back to 2%

·         A soft landing for the economy may be within reach

·         We must not maintain a restrictive policy stance for too long

·         Business contacts point to a loosening but still broadly stable labor market

·         The labor market continues to weaken, but is not weak

·         I am now giving equal attention to maximum employment objective as inflation

·         The Fed must stay vigilant to ensure inflation risks continue to wane

·         I am not quite prepared to declare victory over inflation as risks remain

On Wednesday, Fed’s latest Beige Book said:

·         Economic activity grew slightly in three districts, while the number of districts that reported flat or declining activity rose from five in the prior period to nine in the current period

·         District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months, though contacts in three districts anticipated slight declines

·         On balance, prices increased modestly in the most recent reporting period

·         Contacts generally expected price and cost pressures to stabilize or ease further in the coming months

·         Prices and wages increased modestly during the reporting period

·         Economic activity is flat to slightly down in most Districts

·         Economic Activity "Flat Or Declining", Consumer Spending Slowing In Most Districts

On late Friday, the US Treasury Secretary Yellen said:

·         No red lights flashing on financial risks now

·         The US and China must maintain dialogue

·         I am open to meeting with my Chinese counterpart during US visit

·         I certainly may go back there. I would welcome a visit by my Chinese counterpart and I guess that we will have one way or another a visit

·         We’re seeing less frenzy in terms of hiring and job openings, but we’re not seeing meaningful layoffs

·         The economy is operating at full employment

·         It has been amazing to be able to get inflation down as meaningfully as we have. This is what most people would call the soft landing

·         The WH Economic Adviser Bernstein: The US was sustaining a breakneck pace on job growth that we knew was going to slow down

Conclusions:

After Aug’24, the 6MRA of US core inflation (CPI+PCE) was around +3.1%, the unemployment rate of 4.0% against a target of +2.0% (core inflation-price stability) and 3.5% (maximum employment-unemployment rate). Looking ahead, if US core CPI data for Aug’24 does not surprise on the upside, the Fed may start the eleven QTRs rate cut cycle from Sep’24 by cutting -25 bps each QTR end for in H2CY24, CY25, CY26 and Q1CY27. The Fed may cut -275 bps cumulatively from Sep’24 to Mar 27/June’27 for a terminal/neutral repo rate of +2.75% against average core inflation +2.0% on a durable basis.

But if core inflation proves sticky around +2.25% or 2.50%, the Fed may also keep the terminal repo rate at +3.0% instead of +2.75% by cutting ten times instead of present projections of eleven rate cuts. Alternately, the Fed may also shift the final cut in 2027 to June’27 instead of March ’27 to wait for more data. Fed may also close the QT after Dec’24 at B/S size around $6.50T. At present Fed rate cuts along with QT tapering would be less restrictive and also contradictory.

In July’24, the 6MRA of US core CPI inflation was +3.5% against Fed repo rate +5.5%; i.e. the core real rate was around 2.00%, around Fed’s maximum range of restrictive/real positive rate band (0.50-2.50%). But unless there is a further surge in core inflation, the Fed may like to keep the real core repo rate at a maximum of +2.0% above 6MRA of core CPI. Similarly, at around 2.25-2.00% of core CPI target levels (6MRA), the Fed may keep the repo rate at 2.75-3.00%, so that the minimum real positive rate stays around 0.50-1.00%. Unless there is another COVID-like extreme financial crisis, the Fed may like to keep the real rate in a positive zone to ensure the Goldilocks nature of the US economy.

Most of the time, a Fed rate hike of around 4.50-5.50% to control inflation has caused the next wave of financial crisis in some form or other. Thus Fed always wants to keep some policy space in hand for use in such emergencies (like during COVID) and thus will keep the rate in real positive zones and also sufficient capacity in the B/S to absorb any QE in the next wave of financial crisis. Fed is now maintaining a real positive rate since June-July’23.

Until recently, most of the FOMC policymakers were still in wait & watch mode to be more confident about launching the 11-QTR rate cut cycle from Dec’24 rather than Sep’24 and also not ready to accept the US labor/job market recession despite July’s terrible and 2024 negative revision for NFP. But at the same time, most Fed officials are also taking a cautious tone about increasing the unemployment rate, which unexpectedly surged to 4.3% for some transient reasons. Now after Aug’24, as the US unemployment rate does not fall back to 4.0% or below 4.0% and remains at 4.2%, the Fed may not take any further risk and thus may also launch the next rate cut cycle from Sep’24, just ahead of the Nov’24 US Presidential election.

Overall, after various Fed comments Friday, it seems that the Fed will start the rate cut cycle from Sep’24 by cutting -25 bps and not -50 bps as expected by the market to some extent. Fed may join ECB, BOE, and BOC which cut rates just ahead of respective general elections in their jurisdiction/countries. If the Aug’24 core inflation pace is not stalled or not surprisingly edged up, then the Fed may go for rate cuts from Sep’24 rather than Dec’24 for the next 11 QTRs by -25 bps, which may be already discounted by the market.

Although the Fed usually talks about core PCE inflation targets of around +2.0%, in reality, it targets +1.5% levels of core PCE inflation as core CPI inflation is normally 50-100 bps higher than the core PCE inflation. Ideally, the Fed targets average core inflation (CPI+PCE) of +2.0% and unemployment rate (minimum) around 3.5-3.7%.

Bottom line:

Unless Aug’24 core CPI inflation does not surprise the upside, the Fed may start the next rate cut cycles of 10-11 quarterly rate cuts @25 bps each from Sep’24. The 6MRA of US core inflation (CPI+PCE) may edge down to around +3.0% till Aug’24 from July’24 levels of around 3.1%, while the 6MRA of US unemployment rate was +4.0% till Aug’24. Thus Fed needs to lower US core inflation by another -100 bps and the unemployment rate by -50 bps to fulfill its dual mandate of maximum employment and price stability.

Looking ahead, the Fed may start cutting rates by -25 bps in Sep’24 and Dec’24 rather than -50 bps to balance dual mandate targets. The present rate of core disinflation (CPI+PCE) is around -0.08% per month, almost 50% of the 2023 average disinflation rate -0.16% per month. If the core disinflation average pace remains the same around -0.08% in the coming months, then the Fed may achieve its +2.0% core inflation targets by Aug’25. However, it may be difficult amid rising RM and shipping costs along with labor wage costs and lower labor supply in 2025.

Thus Fed may cut rates at a gradual pace at -25 bps each QTR end rather than jumbo rate cuts of -50 bps, which may stall and reverse the present disinflation process amid increasing US population, higher demand of the economy against constrained supply capacity amid lack of appropriate and time fiscal/policy intervention. Also, the Fed may like to keep some monetary stimulus in reserve for usage in the next financial crisis; it may be the AI bubble (like the dotcom bubble) and increasing geopolitical tensions over the Russia-Ukraine and Gaza war (Israel-Iran?).

Market Impact:

On Friday, Wall Street Futures and gold stumbled from a soft/mixed NFP high after Fed’s Williams, Waller and even Goolsbee (known as dove) almost made it clear that the Fed will cut by -25 bps if Aug’24 core inflation data supports and as of now, there is no question about -50 bps jumbo cuts. Fed will keep cutting rates in an orderly way by -25 bps each quarter end for the next 10-11 QTRs to balance dual mandate of minimum price stability and minimum unemployment rate without causing a hard landing and preferably keeping the US economy in Goldilocks state (not too hot or too cold). Still now there is no sign that the US economy or labor market is heading for a recession, requiring Fed to go for jumbo/panic rate cuts to satisfy stimulus-addicted Wall Street.

The market was expecting almost -150/100 bps rate cuts by Dec’24, but the Fed may cut only -50 bps @-25 bps each in Sep & Dec’24. Subsequently, Gold stumbled from around 2530 to almost 2485. Earlier Gold scaled 2530 soon after US NFP/Job data from an initial knee-jerk low around 2507 on hopes & hypes of jumbo Fed rate cuts @-50 bps. Gold was also under pressure amid increasing public pressure on Israeli PM Netanyahu to finalize a ceasefire/hostage deal, while also buoyed by the increasing war of drones & missiles between Russia & Ukraine (even deep into Russia). The market is concerned about any miscalculation by Russia or the US/Ukraine, leading to mini WW-III.

On Friday, Dow Future initially jumped to around 41095 from 40630 soon after the mixed US NFP job report on hopes & hypes of -50 bps rate cuts in Sep & Dec’24. But Dow Future soon stumbled to almost 40245 on fading hopes of jumbo Fed rate cuts along with the lingering concern of a hard landing. Additionally, Wall Street was also under pressure led by techs amid fading optimism over AI/Chat GPT as some GS reports indicate comparatively lower web footprints in the last few weeks!

On Friday, Wall Street was dragged by communication services, consumer discretionary, techs, banks & financials, materials, energy, industrials, utilities, healthcare, and consumer staples, while interest rate-sensitive real estate only edged up. Scrip-wise, Wall Street was dragged by Amazon, Boeing, Intel, Alphabet, Meta, Nvidia, Broadcom, Honeywell, 3M, Goldman Sachs, Chevron, Microsoft, IBM, Salesforce, Apple, and Verizon, while boosted by Travelers, McDonald’s, Visa, United Health and P&G.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (41260) has to sustain over 41500 for any further rally to 41650/41750*-41950/42100* and 42700/41900-43050/44250-44500/44800 in the coming days; otherwise sustaining below 41450, DJ-30 may again fall to 41000/40700-40500*/40300 and 40150/40000*-39700/39450 and further 39350/39200-39100/38900 and 38500*/38300-38000/37600 in the coming days.

Similarly, NQ-100 Future (19790) has to sustain over 20100-20200 for any further rally to 20300*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20050. NQ-100 may again fall to 19750/19650*-19550/19400 and 19300/19100-18800/18700* and further 18550/18450-18200/17950 and may further fall to 17650/17450-17300/17000 in the coming days.

Technically, SPX-500 (5650), now has to sustain over 5700 for any further rally to 5725/5750*-5850*/5900 and 6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5650 may again fall to 5575/5550-5450/5400* and 5440/5300-5250/5100* and further 5050/4950*-4850/4750 and 4550/4450-4350*/3850 in the coming days.

Also, technically Gold (XAU/USD: 2510) has to sustain over 2540 for a further rally to 2560*/2575-2600/2650 in the coming days; otherwise sustaining below 2535-2520, may fall to 2490/2480-2460/2445* and 2435/2420-2410/2400 and further to 2375/2350*-2325/2300 in the coming days.